Passive investments held by private corporations
In July 2017, a consultation document was released regarding tax planning strategies used by private corporations. One of the items addressed was proposed changes to the taxation of passive investments held by private corporations. Since that time, clients with corporate investment portfolios and rental properties have faced significant uncertainty as details regarding the changes had not been provided.
The two proposals included in the budget are completely revised and much simpler than those originally outlined in the consultation document and will be effective for years beginning after 2018:
Limiting access to the small business deduction
For 2018, the combined general corporate tax rate for active business income earned in Alberta is 27 per cent, while the small business deduction reduces this to a rate of 12 per cent. The lower rate is available for up to $500,000 of active business income each year. Under existing legislation, a corporation’s business limit is reduced where taxable capital exceeds $10 million and is eliminated with taxable capital of $15 million. The budget proposes to also reduce the business limit where a corporation, along with associated corporations, has passive income in excess of $50,000. The business limit will be reduced by five dollars for each one dollar of passive income earned above the threshold. As such, a corporation earning $150,000 of passive income will not be eligible for the small business deduction.
Limiting access to refundable taxes
Canadian controlled private corporations that earn investment income are subject to a high corporate tax rate (50.67 per cent in Alberta for 2018) of which a portion is refundable to the corporation when dividends are paid to the shareholder or shareholders. The purpose of this refundable tax is to prevent individuals from deferring tax on investment income by earning it within a corporation. Currently, the dividend refund is available regardless of whether the dividend paid is an eligible or non-eligible dividend. The budget proposes to restrict the dividend refund where eligible dividends (subject to lower personal tax rates) are paid. An exception will exist for refundable tax arising from portfolio dividends.
Extension permitting a qualifying family member to be an RDSP plan holder
A temporary measure permits a qualifying family member of a person with a disability to be the RDSP plan holder where the individual with the disability is of the age of majority but whose contractual capacity is in doubt. This measure has been extended for five years until the end of 2023.
New reporting requirements for trusts
The government proposes to introduce further reporting requirements for certain trusts beginning in 2021 in an effort to collect beneficial ownership information including all trustees, beneficiaries and settlors. This will create an annual T3 Trust Information Return filing requirement for trusts that historically may not have filed a T3 due to the fact that no capital distributions were made or income earned.
Certain trusts will be excluded from these reporting requirements including, but not limited to, mutual fund trusts, trusts governed by registered plans (i.e. RRSPs, RRIFs, TFSAs, RESPs and RDSPs), graduated rate estates and qualifying disability trusts.
Canada workers benefit
The Working Income Tax Benefit (“WITB”) was first introduced in 2005 to assist low-income individuals with working income. For 2017, the maximum WITB is $1,043 for a single individual with no children and $1,894 for families. The WITB will be renamed the Canada Workers Benefit and beginning in 2019 will provide an increase to the annual maximum benefit of $170, as well as an increase to the income level at which the benefit is phased out.
Tobacco and cannabis taxes
Tobacco taxes will increase by one dollar per carton of 200 cigarettes and inflationary adjustments will occur on an annual basis rather than every five years. The budget also proposes cannabis taxes that will come into effect when cannabis for non-medicinal purposes becomes available for legal retail sale later this year.
Employment insurance measures
The government proposes to make permanent the Employment Insurance (EI) Working While on Claim pilot project, which permits claimants to keep fifty-cents of EI benefits for each one dollar earned up to a maximum of 90 per cent of the weekly insurable earnings used to calculate their EI benefits. The provisions will also be extended to EI maternity and sickness benefits.
EI Parental Sharing Benefit proposes to offer additional weeks of parental benefits where the additional leave is taken by the second parent. This will represent five additional weeks of parental leave for a standard 12 month leave and eight additional weeks for families choosing the extended 18 month leave option at the lower benefit rate. The Parental Sharing Benefit is expected to be available beginning in June 2019.
The above summary only highlights certain budget items. Other items contained in the budget will be relevant for some taxpayers. Of specific note, the budget contains a number of international tax measures with regards to foreign affiliates. For further details regarding all budget initiatives, please refer to the 2018 budget documents on the Department of Finance website.The information provided in this article is a simplified general summary and is not intended to replace or serve as a substitute for professional advice. Professional tax advice should always be obtained when dealing with taxation issues as each individual’s situation is different. This information has been obtained from sources believed to be reliable but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. This information is subject to change and ATB Securities Inc. (Member Investment Industry Regulatory Organization of Canada and Canadian Investor Protection Fund), ATB Investment Management Inc. and ATB Insurance Advisors Inc. reserves the right to change the information without prior notice, and does not undertake to provide updated information should a change occur. ATB Financial, ATB Investment Management Inc., ATB Securities Inc. and ATB Insurance Advisors Inc. do not accept any liability whatsoever for any losses arising from the use of this document or its contents. ATB Investment Management Inc. (ATBIM), ATB Insurance Advisors Inc. (ATBIA) and ATB Securities Inc. [(ATBSI) – Member, Investment Industry Regulatory Organization of Canada; Member, Canadian Investor Fund] are wholly owned subsidiaries of ATB Financial. ATBIM, ATBIA and ATBSI are licensed users of the registered trademark ATB Investor Services